The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday, July 19, increased the Monetary Policy Rate (MPR) to 14 per cent from its initial 13 per cent.
Reading a communiqué after the committee’s meeting in Lagos, Mr Godwin Emefiele, the CBN Governor, said the MPC also unanimously agreed to hold all other monetary policy parameters constant.
The Asymmetric Corridor was thus retained at +100 and -700 basis points around the MPR, the Cash Reserved Ratio (CRR) at 27.5 per cent, and the Liquidity Ratio at 30 per cent.
Emefiele said the parameters were retained to contend the rising trend of inflation in the country.
MPC noted with concern the continued aggressive movement in inflation even after the rate hike at its last meeting and expressed its unrelenting resolve to restore prices stability, while providing the necessary support to strengthen our fragile economy.
As regards the decision as to whether to tighten, loosen or hold, members were unanimous and so did not consider both loosening and retaining rates at the existing levels at this meeting.
This is because loosening will worsen the existing liquidity condition in the economy and further dampen money market rates necessary to stimulate savings and investment.
Members also felt that loosening will trigger the weakening of the exchange rate which could pass through to domestic prices.
MPC did not also consider holding rates constant because a hold stance will suggest that the bank is not responding sufficiently to both the global and domestic price developments as inflation numbers continue to trend aggressively upwards.
And as regards tightening policy stance, members were unanimous that given the aggressive increase in inflation, coupled with the resultant negative consequences, particularly on purchasing power of the poor as well as retarded growth, there is the need to continue to tighten.
Inflation, Reason For Policy
Emefiele, however, said that the policy dilemma was hinged around the level of tightening needed for inflation without dampening manufacturing output which could result from the higher cost of borrowing.
The CBN governor also said that aside narrowing the negative real interest rates down, members were also of the view that tightening would signal a strong determination of the bank.
This, he said would also help to aggressively address its price stability mandate and portray the MPC’s sensitivity to the impact of inflation on the vulnerable households and the need to improve their disposable income.
Furthermore, Emefiele said that members noted that the last 150 basis points hike by the committee in May had not permeated enough in the economy to halt the rising trend in inflation.
He noted that the month-on-month percentage current increase in headline inflation rose sharply in June 2022, compared with May 2022.
The committee also noted that other complementary administrative measures deployed by the bank to address the growth in money supply did not moderate inflationary trend.
Addressing a balance of policy objectives and development in the global and domestic environment, the committee resolved that the most rational policy option will be to further strengthen its tightening stance in order to effectively curtail the unabated rising trend of inflation.
Members were conscious of the fact that output growth remained fragile.
However, not contending inflation now could erode the moderate gains achieved in improving consumer purchasing power and thus worsen poverty levels of the vulnerable populace.
To ensure that output still remains in focus, MPC advised the banks manager to continue to use the development finance tools to support the Agricultural and Manufacturing sectors in Nigeria.